What MNC managers should know about GATT?

Intellectual property rights protection: What MNC managers should know about GATT?

Harvey, Michael G

Multinational Corporations (MNCs) based in the United States have been the target of companies and individuals who have infringed on the property rights of these MNCs. This unauthorized use of patents, trademarks, copyrights, logos, brands and in some cases facsimile products has economic and non-economic consequences. This paper examines the present efforts of MNCs and the new provisions in the General Agreement on Trade and Tariffs (GATT) that address the unlawful commercial act of product counterfeiting and infringement on intellectual property rights.

INTRODUCTION

The attractiveness of international market opportunities has enticed United States based multinational corporations (MNCs) to aggressively expand globally. One of the consequences of this international growth has been the unprecedented counterfeiting of products and infringement on the intellectual property rights of these United States based MNCs (Harvey & Ronkainen, 1985; Harvey 1988; Griffin, 1992). It has been estimated that United States based companies, who pioneer new technologies and have high brand awareness, lose an estimated $61 billion because of patent and copyright infringement (Samuel, 1993).

Counterfeiting is a problem that has been recognized as a potential threat to fair competition for over a century in the United States. Recently, more attention has been paid to the intangible dimensions of products/services due to the value ascribed to them by customers. “Intellectual property” is a general term that describes inventions, identifying characteristics, or technological dimensions of a product that differentiate it from other products being sold in the marketplace. Patents, trademarks and copyrights are all intellectual property (Hill, 1985).

The improper use of intellectual property is considered to be unfair competition in the United States. Laws have been established to provide protection against such things as replicating trade packaging, using similar corporate or product identification, misappropriating trade secrets, as well as counterfeiting products to be sold as originals. The issue , therefore, becomes what are the rules and regulations relative to intellectual property rights in the international marketplace? This article examines some of the legal dimensions of intellectual property rights in the domestic and global market (see Figure One), including unilateral, bilateral, and multilateral arrangements to highlight potential gaps in protection of intellectual property. The article also explores proactive measures that can be taken by MNCs to reduce their risk of unauthorized use of their intellectual property.

REASONS FOR THE RAPID GROWTH OF INTERNATIONAL COUNTERFEITING

Product counterfeiting and infringing on intellectual property rights have been increasing since the end of World War II, but the most rapid growth has occurred in the 1980s and 1990s. By better understanding the reasons behind accelerated counterfeiting and infringement of intellectual rights worldwide, one can begin to appreciate the amount and kind of planning needed to combat the problem.

The world has recently experienced a communication explosion. Immediate correspondence is commonplace; satellite communication can beam information around the world. As a result, some advertising, once directed at a national market, is now receivedby a global audience. A tremendous amount of product information and publicity reaches the world community; with only a few exceptions, the bulk of it is for highly visible branded products. These promotions, coupled with the prestige associated with products produced in the United States, have resulted in a greater demand for these products. Wide product distribution and intense branding strategies also increase the visibility and desirability of United States’ produced goods (Harvey, 1988). This increased demand is fueled by shortages of products in many foreign countries. A counterfeiter can supply bogus goods at below-market prices to satisfy this great demand (Crump, 1985). These counterfeit goods provide a substitute for the luxury goods that consumers in these countries demand at a price that is within their financial means. Many times, in fact, the counterfeit product is priced higher than the original to add prestige and convince the customer that the product is not counterfeit (Robinson, 1988).

Another reason the increase in counterfeit products and infringement on the intellectual property rights of United States’ manufacturers hinges on the legal dimensions of the problem: is (1) the lack of coordinated legislation, (2) enforcement of the existing legislation, and (3) meaningful monetary deterrents for counterfeiting. No international body exists to coordinate the efforts to countermand counterfeiting. In addition, the United States Freedom of Information Act of 1966 may open the door for domestic counterfeiters. This Act makes it relatively easy for pirates to obtain the necessary technical information to allow them to “knock-off” brand products or to discover the knowhow to produce the product (Harvey & Ronkainen, 1985). In addition, many foreign countries have virtually meaningless laws, lax enforcement, or provide only negligible penalties for counterfeiting or theft of trade secrets. At the present time, some countries are enacting legislation designed to reduce counterfeiting and the unauthorized use of intellectual property, but the impact may not be felt for quite sometime (Brauchli, 1994; Bruce, 1994; Corben, 1994; Friedman, 1994; Nagel, 1994; Rao, 1994). These laws however are difficult to enforce and do not affect countries in which the vast majority of the counterfeiting takes place (Crump, 1985; Harvey, 1988; Caffey, 1993; Friedman, 1994).

Product counterfeiting is a highly profitable business in many developing countries and has aided the growth of product piracy and the unauthorized use of the intangible dimensions of a product offering. While there is no evidence that any sovereign state supports or encourages counterfeiting by not enforcing their existing laws, they do not discourage counterfeiters in their country. In fact, the majority of counterfeit products have been traced to developing countries, especially Pacific Rim and South American nations. Trademark violations also are an outward manifestation of the underlying struggle of producers in newly industrialized developing countries to compete in the international marketplace (Folsom & Spanogle, 1991; Helgott & Meller, 1993). Producers in these developing countries counterfeit established trademarks to gain a foothold in the world market and increase their export capabilities. These producers are able to produce replica products; however, they have not mastered the ability to develop products on their own, nor have these producers gained a reputation through branding, trademarks or logos that would help their products stand on their own. It should not be construed that MNCs from developed countries do not have counterfeit products produced in developing countries, they do. If the developing country does not actively discourage counterfeiting and local producers are capable of manufacturing the product at a competitive cost, the best of both worlds can be had by the MNC. The counterfeit product is produced economically in a country that does not discourage counterfeiting through lax enforcement of their laws.

DOMESTIC LEGAL BACKGROUND TO PRODUCT COUNTERFEITING/INTELLECTUAL PROPERTY ISSUES

Comprehension of the complicated legislative framework that surrounds the legal aspects of intellectual property rights is an essential step in the development of a corporate plan to deal with the problems associated with product/trademark counterfeiting. A survey of the development of counterfeit law helps provide a background for understanding the current legal environment .

Counterfeiting was listed in an English statute of 1352 as one of the “seven heads of treason,” a crime punishable by hanging or burning at the stake. American law, however, has tended to be less harsh than its English counterpart. Always strict with currency counterfeiting, American law did not extend the concept to product counterfeiting until well into the 1800s. No comprehensive trademark legislation was enacted in the United States until the Trademark Act of 1870 (Performers, 1994). This legislation established a federal regulatory scheme that provided injunctive relief and monetary damages for the owner of the trademark. The Penal Act of 1876 added penal sanctions to the civil remedies outlined in the 1870 legislation and established criminal penalties for violations of trademark laws (Gerber, 1984).

The United States Supreme Court, in a series of cases collectively known as “The Trademark Cases,” declared both statutes unconstitutional. Congress, in an effort to sidestep the Supreme Court’s ruling, enacted trademark statutes in 1881 and 1905 that capitalized on Congress’ ability to regulate interstate commerce under the Commerce clause of the U.S. Constitution. This legislation allowed Congress to police trademarks used in interstate commerce or commerce “with foreign nations or with Indian tribes”; Criminal sanctions however were omitted (Gerber, 1984).

At the beginning of the twentieth century, Congress, exercising increased control over interstate commerce, enacted the Trademark Act of 1905. But this act, amended 16 times, became a hodgepodge of confusion among regulators and businessmen. In 1930, Representative Fritz Lanham (D-Texas), in an attempt to clarify the legal chaos of counterfeiting legislation, formed a congressional committee that began the task of consolidating federal trademark law. In 1946 Congress enacted the legislation commonly known as the Lanham Act that to this day provides the structure for American product-counterfeiting protection.

The Lanham Act permits the filing of a lawsuit in federal court for infringement of trademarks that are federally registered. In recent years this legislation also has been invoked in broader context including: infringement of literary titles and entertainment advertising; false representation that a product was created, designed, or authorized by the plaintiff; copying of coloring, packaging, display designs, and sales brochures; false comparative advertising; and failure to disclose the country of origin of a product.

In addition, manufacturers can invoke the Act’s provisions in attempts to protect design configurations or exterior shapes of products on the basis that those configurations function as common trademarks protectable under this section, even absent their registration with the U S Patent and Trademark Office (Gerber, 1984).

Despite the great strides taken by the Lanham Act, the United States’ legal system was in need of stricter, more severe penalties for the counterfeit offenders, especially in light of the drastic growth of counterfeiting since WWII. The 1946 Lanham Act included no criminal penalties for counterfeiting and virtually meaningless monetary damages compared to the profits the counterfeit goods generated. The business community, through organizations such as the International Anti-Counterfeiting Coalition (IACC) in San Francisco, applied pressure to their representatives and urged Congress to pass new laws (Putting, 1984).

Congress reacted to the need for greater counterfeiting protection by enacting tougher laws supporting the trademark owner. The 1984 Trademark Counterfeiting Act contains harsher penalties than those in past legislation, including penal sanctions and larger monetary fines. This legislation also provides for an automatic award to the plaintiff of the greater of treble damages or treble the defendant’s profits if the plaintiff can show the defendant intentionally and knowingly used a counterfeit of the plaintiff s mark. In addition, the courts require only that there exists a “likelihood of confusion” between the defendant’s mark and the plaintiff s mark. The plaintiff does not have to prove the defendant had the “intent to deceive” to obtain a favorable judgment. This latter provision in the law simplifies the plaintiff’s legal burdens under the Act.

Furthermore, the 1984 Trademark Counterfeiting Act gives law enforcement officials the power to seize goods without giving advance notice to the party from whom the goods are to be confiscated. Previously counterfeiters could easily hide their assets upon notification of a seizure and avoid any legal action. However, the plaintiff still needs to file an affidavit giving a description of all matter to be seized and a specific description of where it is to be seized; details that are often difficult to pin down for any length of time (Crump, 1985). Congress, through the amended version of the Lanham Act, has attempted not only to induce private victims to prosecute a suspected counterfeiter with the prospect of significant reparations, but also to deter potential counterfeiters from embarking on such an illegal business venture through the enactment of stiff penalties.

For the most part, the 1984 Act has helped to dramatically reduce the amount of counterfeit products produced in the United States (The Trademarks, 1985-1986; Chiles, 1986). The primary concern, however, is the ban on publicity included in the Act. No media attention can be given to the seizures of counterfeit goods until after court proceedings. Experts in the field believe that this media ban negatively affects the legislation. Because counterfeiters do not realize the extensive steps being made to stop product piracy, the deterrent effect of the law and its enforcement are minimal. In addition, investigative proceedings are handicapped by a provision that states that a private party cannot effect a seizure order without a law officer or marshal present. But, counterfeiters move their merchandise quickly, and often before a private investigator can get enough information to convince the appropriate official to take action. Also, due process requirements often allow counterfeiters to slip through the cracks because of the time involved in insuring seizure actions are legitimate. After so much time has passed, great damage has already been done to the plaintiff. The counterfeiter also may have been able to turn out an ample amount of phony merchandise, potentially devastating the legitimate market. These conditions place frustrating restrictions on a company’s attempts to crack down on counterfeiters.

INTERNATIONAL LEGAL DIMENSIONS AND GATT

The international legislative roots of intellectual property protection stem from a diplomatic conference held in Berne, Switzerland in 1886 (Recommendations, 1986). The hub of concern was the recognition of authors and artists’ economic rights to their creations. This recognition of the intangible dimensions of a “product” underscores the need to protect the intellectual property of a business. Two fundamental principals of the Berne Convention still enforce today are:

(1) The Union Concept: contracting states constituted themselves into a Union for the protection of intellectual property. The Union sought to underline that it was not a matter of merely negotiating a contractual agreement; but rather, a genuine “society” of states, able to go on existing even after the departure of one or more. The Union was to be open to all countries of the world and the Convention would be periodically revised, helping keep pace with judicial, technical and economic change.

(2) Principle of National Treatment: intellectual property owners who were subjects or citizens of any of the countries of the Union should enjoy in all other member countries the same protection of their works as those countries accord their intellectual property owners.

The Berne Convention remains the cornerstone of intellectual property protection in the global market. In the hundred years since the Convention it has been revised five times. The fundamental principle of the Berne Convention as well as the GATT agreement is national treatment:

Authors, inventors, right holders shall enjoy, in respect of works for which they are protected under the Berne Convention, in countries of the Union other than in the country of origin, the rights which their respective laws do now or may hereafter grant to their nationals, as well as the rights specially granted by the Convention (A Possible, 1993).

It is envisioned that the GATT Uruguay Round of Multilateral Trade negotiations will provide the legal infrastructure to strengthen intellectual property protection and therefore will continue the updating of standards established in the Berne Convention of 1886. The proposed Berne Protocol of the GATT agreement updates the types of counterfeiting and handling issues of intellectual property to be included in the protection clause of the agreement; they include the following: (1) computer programs; (2) database; (3) rental rights; (4) non-voluntary business for the recording of musical works; (5) non-voluntary license for primary broadcasting and satellite communication; (6) distribution right, including importation rights; (7) duration of the protection; (8) communication to the public by satellite broadcasting; (9) enforcement of rights; and, (10) natural treatment (Performs, 1993). GATT has taken on the role protecting intellectual property rights of the signatures of the agreement. The Trade Related Aspects of Intellectual Property Rights (TRIPS) and the World Intellectual Property Organization (WIPO) also show similar objectives: the strengthened protection and improved enforcement of intellectual property rights via multilateral instruments (Wallerstein, Mogee and Schoen, 1993). The impact of GATT on intellectual property rights may be understood through a more detailed analysis of patents, “know how”, and copyright and trademark law.

PATENTS

Patents are probably the best way to protect transferred technology in the international marketplace (Robinson, 1988). Patents also are a necessity when licensing technology to foreign affiliates. Patents provide one of only two legal methods of enjoining the future use of the technology, the other being trade secret enforcement. It is important to obtain a patent in the firm’s home country and the host country prior to transferring the subject technology (Samuel and Stanko, 1993).

The primary advantage of obtaining a patent is that it grants the holder the exclusive right to use the technology for a certain number of years. The primary disadvantage is that by filing, the patent holder has made the technology public information, and after the term of years is up, the patented technology may be used by anyone. Other disadvantages of obtaining a patent include the time and cost required, the inherent difficulties in proving patent infringement, and the problems associated with the uncertainty of patent validity (Wallerstein, Mogee and Schoen, 1993; Hill, 1994). However, when considering entering into an alliance with a current or potential competitor, patents provide the best protection for an American firm (Harrigan, 1984; Mowery, 1985; Perlmutter and Heenan, 1986; Robinson, 1988).

International protection of patents is uncertain and dependent on a number of factors. There are two types of patent systems in the international sector: registration and examination. If a country uses the registration method, that country will issue a patent upon registration without inquiring into the patentability of the invention. The countries that utilize this system issue what are known as “weak” patents. These patents are weak because they are subject to attack and the validity of these patents may only be determined after litigation in the appropriate jurisdiction. The examination-type system issues a patent after an examination of the patentability of the invention and a waiting period to allow for any challenges to the patent. These patents are considered “strong” because it is much more difficult to attack the validity of an examined patent (Samuel and Stanko, 1993; Wallerstein, Mogee and Schoen, 1993). Regardless of the type of patent system currently used by a country, GATT signatory countries have a oneyear transitional period to conform to the terms of the agreement if that signatory country is a developed country; developing countries and countries moving toward a market economy have five years to conform; least developed countries are allowed 11 years. If the patent involves pharmaceutical or agricultural chemical products, however, countries must preserve the novelty of the patent by accepting the application even if the patent is not granted until the end of the country’s transitional period.

Patent recognition in the international community is also covered by the Berne Convention (as previously discussed) and the Patent Cooperation Treaty. The Patent Cooperation Treaty has approximately 40 signatory countries, including the United States. It provides for filing in specified centralized countries instead of in each individual country (Folsom, Gordon and Spanogle, 1991). Generally, this system simplifies the process of gaining international patent protection in addition to increasing the likelihood of patent validity.

The GATT agreement resolves long-standing trade irritants for United States’ patent interests, especially pharmaceutical and agricultural chemical companies. Key benefits provided under the agreement include the following:

* product and process patents for virtually all types of inventions, including pharmaceuticals and agricultural chemicals;

* meaningful limitations on the ability to impose compulsory licensing;

* a patent term of 20 years from the date the application is filed; and

* prompt implementation of procedures to permit the filing of patent applications covering pharmaceuticals and agricultural chemicals upon the entry into force of the agreement (GATT, 1994).

KNOWHOW

“Knowhow” is commercially valuable knowledge (Folsom, Gordon and Spanogle, 1991). Just about anything can be knowhow, including trade secrets and manufacturing processes; the only requirement is to pay for it. The problem with knowhow is that it is virtually impossible to protect. The primary method of protection is the use of employee non-disclosure and non-use agreements. The problem is that if the secret does get out, a company has relatively little recourse against the user of the knowledge. Thus, protection in the international marketplace of knowhow is limited, at best. It is mostly a function of contract, tort and trade secret law (Folsom, Gordon and Spanogle, 1991). The problem arises when knowledge is illegally leaked and the wronged party tries to recover. It is obviously difficult, if not impossible, to return a company to its position prior to the breach of contract, as it is doubtful that suing the guilty employee would make the company whole.

In addition, the United States favors patented information over information sought to be protected via trade secret law. For example, the United States Supreme Court has held that valuable secrets that have not been patented but which may have been eligible for patent protection, and have been in commercial use for over a year, cannot be protected through legal means. This decision was handed down notwithstanding that the wrongful appropriation was committed through breach of an obligation of confidence (Robinson, 1988). Therefore, any licensing of trade secrets should be entered into, or have a specified choice of law provision specifying, somewhere outside of the United States, preferably in a country with stricter laws over trade secrets, like Canada, Japan, and much of Europe (Berkowitz, 1994)

COPYRIGHT/TRADEMARKS

A copyright provides protection for literary and artistic expression (Robinson, 1988). Sound recordings, audio-visual works, books, computer programs, and data bases are generally recognized as copyrightable. United States’ protection of copyrights typically covers the period from the date of creation to 50 years after the death of the author or creator. Copyrights are protected internationally under the Universal Copyright Convention of 1952 (UCC) and the Berne Convention of 1886. The United States is a member of both, most recently acceding to the Berne Convention in 1989. Absent protection under one of these Conventions, United States’ firms must obtain independent copyright registrations in each country recognizing such rights.

The UCC excuses foreigners from registration requirements provided notice of a claim of copyright is adequately given. It also provides for a 25-year minimum term for copyright protection measured from the date of publication, prior registration or death of the author (Folsom, Gordon and Spanogle, 1991).

The Berne Convention provides for a 50-year minimum term for copyright protection. Many American companies simultaneously published their works in Canada and United States. By doing so, these works were granted more generous copyright protection in a greater number of countries. The United States also adheres to the Mexico City Convention of 1902 and the Buenos Aires Convention of 1911, providing copyright protection to American publishers in both Central and South America.

The text of the GATT agreement resolves some key trade problems for United States’ software, motion picture and recording interests by:

* protecting computer programs as literary works and databases as compilations under copyright;

* imposing an obligation on Members to grant owners of computer programs and sound recordings the right to authorize or prohibit the rental of their products;

* establishing a term of 50 years for the protection of sound recordings as well as requiring Members to provide protection for existing sound recordings; and

* setting a minimum term of 50 years for the protection of motion pictures and other works where companies may be the author (GATT, 1994).

The Agreement also obligates Members to comply with the provisions of the Berne Convention, the preeminent international copyright treaty, with the exception of that Convention’s requirements on moral rights. In addition, trademark protection is enhanced under GATT to:

* requirements Parties to register service marks in addition to trademarks.

* enhances protection for internationally well-known marks;

* prohibits the mandatory linking of trademarks;

* prohibits the compulsory licensing of marks (A Possible, 1993; Performers, 1993; GATT, 1994).

The GATT agreement simplified the procedures for obtaining international trademark and patent protection. When considering a potential alliance with an international partner, the American firm should consult the list of signatories to these treaties to determine whether the potential partner’s home country complies with its provisions (Robinson, 1988; Pucik, 1991; Wallerstein, Mogee and Schoen, 1993). However, this is only the first step, because some countries may be a signatory to a certain treaty and still not comply with its provisions; while another country may not have been a participant in the treaty, but still has a history of strictly enforcing intellectual property rights from other countries (Eccles, 1994). Thus, the country’s historical stance on intellectual property rights must be analyzed as this may be as important, if not more, than discovering whether the country has signed an international treaty.

DIVISING A CORPORATE RESPONSE TO GLOBAL PRODUCT COUNTERFEITING AND INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS

Commitment is the key element of any plan, but this is especially true in the adoption of a corporate plan aimed at limiting opportunities for product counterfeiting and protection of intellectual property. From the outset, the firm must adopt a protectionist posture. The firm needs to realize the devastating economic effects of counterfeiting and understand that the firm cannot rely solely on the legal framework of domestic and international anti-counterfeiting legislation. There are certain procedures for protecting a firm’s products and intellectual property. Not every suggestion will be applicable to every organization, but the model provided here (see Figure Two) provides guidelines to be followed to help prevent international product counterfeiting.

PERSONNEL WHO NEED TO BE INVOLVED

The adoption of a strategic plan to prevent the counterfeiting of corporate products should involve personnel throughout the company. All members of the corporate community should be part of the policing process in one way or another. _e product team and the control/surveillance team. A product team and a control/surveillance team constitute the heart of the anti-counterfeiting efforts. The task force should be chaired by an executive in the corporation whose primary duty is to monitor products and trademarks for potential counterfeiters.

RESEARCH AND DEVELOPMENT. The susceptibility of the product to counterfeiting should be analyzed by the research-anddevelopment team in coordination with the marketers, based on the level of technology utilized in the product, the types of distribution channels used, the degree of brand loyalty associated with the product, and the intensity of advertising. However, all products are susceptible in some degree to counterfeiting, so every product should be approached as a potential counterfeit candidate.

Research and development, therefore, needs to investigate certain internal control systems that could be applied to products to aid in counterfeit detection. These control systems utilize newly developed technologies to help stem counterfeiting. One such method has been put into commercial use by Light Signatures, Inc. This company sells certificates and labels that make it possible to tell whether an article is genuine. The certificates look like ordinary pieces of paper. Like fingerprints and signatures, however, all these pieces of paper are different. Light Signatures’ system is based on a beam of light shining through a part of the certificate onto an array of 256 sensors. The different alignment of fibers in each certificate produces a unique pattern of response from the sensors, which is encrypted in a string of digits that becomes the identification number. This number is then printed on the certificates, which are put into the product packages. A note included with the product asks the consumer to mail the certificate back to Light Signatures.

LSI runs the certificate through the system and compares the result with the number printed on the certificate. If the numbers do not match, the certificate is bogus, and probably the product it came with is also bogus. Thus, the manufacturer is able to verify the validity of goods through the mail.

Another technological advance that could aid in the detection of counterfeiting has been developed by the Baird Corporation, a company that specializes in security and military electrooptics. Baird sells invisible ink for bar codes to the government and private industry. The ink is composed of special chemical compounds that, the company claims, counterfeiters cannot reproduce. Baird then sells hand-held instruments that read the bar codes to determine the codes validity.

Another option the research-and-development team should investigate has been introduced by Veritec, Inc. Veritec can laser-etch tiny glyphs on items ranging from autoparts to microchips. When scanned and decoded by one of the company’s computers, the glyphs reveal the product’s identification number and other pertinent information, such as the date and place of manufacture. This tool can be especially useful in detecting the product validity.

Finally, the research and development team should investigate Polaproofing. This technical advance developed by the Polaroid Corporation consists of a transparent polyester film that incorporates unique optical effects which are virtually impossible to duplicate. The film, only about one inch square and .003 inches thick, can be adapted for use as an adhesive label or sticker attached to products to determine the products’ authenticity. Viewed in normal light the label produces a rapidly changing array of form and visual effects; the label also can be verified with a special machine that enlarges the label. Trademarks or manufacturers’ logos can be included in the label and customized to each corporation’s requirements. Tampering with the label destroys the optical effects created by

1,500 cylindrical lenses per square inch. This system provides added product security at a relatively low cost, as the labels cost about two cents apiece.

The research and development team also needs to be able to communicate to the legal staff those aspects that make the product unique and patentable. Product attributes, characteristics, and formulas can all be included in the legal team’s arsenal.

DISTRIBUTION NETWORK

Representatives from the marketing department who are responsible for management and control of the firm’s distribution system also need to take part in the counterfeit prevention task force. These members of the product team need to ensure the integrity of the manufacturer’s channels of distribution. Corporate headquarters must constantly verify channels of distribution, because product counterfeiters usually enter the channel system through a weak link in the distribution chain. The distribution managers need to ensure that the authentic merchandise is sold by channel members and that the intellectual property rights of the company are honored. In addition, some channel-ofdistribution members may augment their inventories of authentic products with counterfeit products purchased at substantial discount. Channel members may purchase counterfeit products unknowingly; in addition, many times channel members purchase counterfeits products to bolster their profits.

Education is the first step in extending the counterfeit prevention program into the distribution channels. Middlemen must be made aware of their legal obligations and the strict penalties for trafficking in counterfeit goods provided for in the 1984 Trademark Counterfeiting Act. These penalties should serve as a deterrent for accepting counterfeit goods. Furthermore, certain representatives at key locations in the distribution network need to be educated about counterfeit detection. If educated properly, the distributors could become second-line investigators who are constantly in the field policing the environment for bogus products. An incentive system could even be designed to reward distributors for the detection of counterfeit goods.

Control of the distribution system, however, most frequently should remain with the manufacturer. Maintaining control is often difficult for larger manufacturers who have extensive channels of distribution, but it is advisable for the manufacturer to play a primary role in the anti-counterfeiting control program. Investigations of the distribution channels should be conducted to ensure integrity. Again, specific rewards and benefits could be associated with the maintenance of clean channels of distribution.

Finally, an unconventional option open to a manufacturing firm confronted with a counterfeiting problem in the channel is to recruit existing counterfeiters to produce for the legitimate producer. If the counterfeiter produces a quality product, a little effort and education could turn him into a franchisee. The benefits to the parent company could be substantial. Profits the former counterfeiter used to siphon off the trademark owner could now accrue to the trademark owner’s company. In addition, the franchiser would gain quality control and inspection rights. This option may not be feasible in many circumstances, but it could turn an enemy into an ally.

PROMOTION TEAM

All promotion planners must bear in mind the need to prevent product counterfeiting and the unauthorized use of intellectual property. If an outside advertising agency handles this area, that agency needs to be aware of the manufacturer’s concern for counterfeit protection and the need for interaction with the other members of the team. Care can be taken from the very beginning of product development and promotion, with the proper selection of a product name and promotional vehicles.

The counterfeit prevention task force also needs to cultivate relations with the various elements of the mass media, probably through the marketing department and its promotional ties. This part of the network system is important when counterfeiting problems are detected. The manufacturer needs to be certain that any media attention given to the problem is presented in the most beneficial way possible. If a news announcement of the counterfeited product is necessary (such as for a dangerous pharmaceutical counterfeit), media contacts who can effectively handle the situation are essential. The firm’s preventive measures should also receive media attention that can serve as a reassurance to the public of the integrity of the product, as well as providing a valuable source of free publicity. At the same time, counterfeiters will be made aware of the importance the producer places on reducing counterfeiting.

LEGAL STAFF

Whether the manufacturing firm is large enough to support its own core of lawyers, legal advice is essential to counterfeit protection. The registration or licensing of products is a lengthy, time-consuming, sometimes confusing ordeal, and it involves an inordinate amount of paperwork that would best be handled by legal counsel. Under United States law, the manufacturer has three pieces of proactive legislation he or she can use to aid in the protection of a product. The legal team should guarantee that each safeguard is utilized in every possible circumstance.

A United States patent is the first safeguard available to a manufacturer. A patent gives its owner the right to exclude others from making, using, or selling the invention defined in the patent for a period of 17 years. To be eligible for a patent the applicant must show that the process or product is new, useful, or unique. The patent-application process is a long one lasting up to two years. The application also must be filed within one year of public disclosure of the product to be eligible for protection. In order to recover damages under patent-protection legislation, notice of the patent must be given to the public. This notice requirement can be achieved simply by placing the patent number on the article or product being sold.

The trademark is the second safeguard available to a manufacturer. A trademark is any word, name, symbol, or combination thereof adapted and used to distinguish specific goods from others. A trademark helps consumers recognize the manufacturing source, indicates the good’s quality, symbolizes goodwill, and can be used to foster brand loyalty and thereby increase sales. A trademark also provides protection for the owners of the mark from those who attempt to trade on the goodwill and recognition by using the same or similar mark without permission. Common law also can provide protection for a trademark. If a trademark is used commercially for a certain period of time, even without registration, legal rights and remedies may accrue. Certain benefits, however, come from federal registration. Registration with the United States Patent and Trademark Office provides constructive notice throughout the U.S. of the registrant’s ownership of the mark. Also, the United States Customs Service can be called upon to bar importation of foreign goods bearing marks that infringe upon registered trademarks.

Obtaining a copyright is the third, and oftenover-looked, way to safeguard advertising, promotional materials, creative works, tapes, discs, or product designs associated with products. To be eligible for a copyright, a work must be an original expression of an idea; the idea itself is not copyrightable, only the expression of that idea qualifies for protection. Novelty and distinctiveness have nothing to do with copyright law. Once registered, the copyright is covered by the federal Copyright Act of 1976. The Copyright Act grants the owner the exclusive rights to reproduction, adaptation, publication, performance, and display for the length of owner’s life plus 50 years.

These three safeguards provide several legal options for the manufacturer. The manufacturer’s legal team should determine which aspects of the product and its promotion qualify for protection in order to provide the manufacturer the maximum protection available under the law. Additionally, lawyers need to be informed of the product and the firm’s counterfeiting policy if counterfeit proceedings become necessary. The legal team should be completely prepared to go to legal battle if a counterfeit product is detected. Finally, the manufacturer should consider contractual remedies at all stages of the process, including the use of arbitration, choice of law and choice of forum clauses. Specified damages’ clauses plus non-disclosure clauses can alleviate some of the problems of litigation. The legal team should take the most immediate and effective action to ensure the rapid removal and destruction of the counterfeit goods from the market.

INVESTIGATIVE TEAM

Constant monitoring of the product environment needs to be conducted by either internally specified personnel or externally through private investigators. Private investigators are the main source of counterfeit detection and one that needs to be considered by manufacturing firms. One of the primary problems surrounding the counterfeiting issue is the extent to which counterfeit products have saturated the market and the frequency of purchasing by the unknowing consumer. Private investigators can be used to continuously sample product offerings at the retail level to help overcome this problem.

If counterfeits of a product do exist or there is unauthorized use of trademarks or logos, no legalization can be taken without first detecting the existence of the counterfeit product: many manufacturers may well be victims of great losses because of counterfeiting, but they have not investigated the product’s market environment, so they do not know of the problem. Having qualified field representatives almost assures that no counterfeit good can go undetected once it has been found in a retail setting. Counterfeit investigators who know their business can spot a counterfeit product on the street and immediately begin actions necessary to lay the foundation for prosecuting the counterfeiter.

PERSONNEL DEPARTMENT

The personnel department also needs to implement a strict education program that increases all employees’ awareness of the importance of the product’s trademark and the need to protect the product from counterfeiting. Each employee, if properly educated, can become a private investigator during his or her normal shopping behavior. If the importance of the issue is conveyed and incentives are given for discovering counterfeit products, employees should become a vital link in the counterfeitprotection chain.

LOBBY TEAM

The lobbying efforts of the counterfeit prevention task force may not be an ongoing process, and the lobbyists need not necessarily be a separate group of operatives. The lobby team could be just the task force’s chairman, who should be the most knowledgeable person in the organization about counterfeit protection, or, perhaps, the legal staff. Organized lobbying is an essential part of the American legislative process and can also be a very powerful tool in enacting new legislation. Manufacturing groups such as the International Anti-Counterfeiting Coalition (IACC), International Intellectual Property Alliance, the President’s Export Council and the International Chamber of Commerce can be helpful in monitoring and alerting manufacturers when the products or property rights are being used illegally. Continued pressure from manufacturing interests could possibly encourage the United States to use its power to eliminate the specialized systems of preferences for counterfeiting nations or force authorities to take swifter, harsher action in punishing counterfeiters and those who use intellectual property.

Organizations working together with a cohesive, unified strategy, such as the IACC, can have an impact on foreign governments as well by participating in or lobbying for the implementation of education programs abroad. The Department of Commerce has recently organized intellectual-property seminars in selected Asian and South American countries (Corben, 1994; Friedman, 1994; Bangsberg, 1994; Nagel, 1994). These seminars, which draw on the expertise of officials of the Patent and Trademark Office and the Copyright Office as well as the private sector, seek to clarity the intellectual-property situation in those countries and generate support for effective intellectualproperty protection. Manufacturers’ groups could provide the additional funding necessary to increase the use of such programs. Intellectualproperty lawyers also could assist the governments in developing anti-counterfeiting legislation and enforcing existing laws. At the same time, specialists could help develop effective administrative systems for patents, copyrights, and registration information.

Another topic that could be covered in these intellectual property seminars is the long-term impact of reliance on counterfeiting. When countries rely on counterfeiting, they are not developing their own technology or an effective, legitimate way of doing business. Counterfeiting dependency tarnishes these nations’ business reputations. Multinational corporations from other countries will be reluctant to have future dealings with these businessmen because of their reputations for counterfeiting and illegitimate business practices. These repercussions of counterfeiting should be pointed out to the foreign business people and their governments.

The importance of education efforts in these multinational environments is essential to the overall effectiveness of the counterfeitprevention plan. The adoption of a few laws in a few countries can not greatly reduce the likelihood of product counterfeiting throughout the world. It is the combined effort of all the key constituents in all environments that can truly have a legitimate and important effect on counterfeiting.

SUMMARY/CONCLUSIONS

The formation of the EU, NAFTA and the recent affirmation of multilateral trade agreement GATT establishes the backdrop for the harmonization of product counterfeiting and intellectual property legislation (Berkowitz, 1994). The GATT Agreement signals a renewed effort on the part of industrialized countries to monitor and control the unauthorized production of products and unauthorized use of intellectual property. Domestic and international legal restrictions are only the starting point to effectively monitor counterfeits of products as well as intellectual property. A proactive plan implemented by MNCs needs to be used to reduce the probability of counterfeiters targeting MNCs.

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